Wednesday, June 24, 2009

Government Relations

Unlike USA, China is continuing its policy reform, especially in the area of economy. Usually, government would guide organizations. Bus sometimes, government would rely on organizations. Especially when new policies come out, government would need the cooperation from organizations. Therefore, in China, government relations seem to be more important to companies than in USA. Sometimes, an dynamic interaction with government would even create business opportunities which did not exist before.

Life Experience Example

Gaea Gem is a business group which regards rice production as primary business. It is the largest organization in my hometown in China. My mom used to work for it, dealing with government relations. Because of the nature of farming business, the coordination with government has great influence on the corporate performance. Several years ago, the company planned to start a manufacturing plant to produce rice derived food product. And this plan soon got approved by the “pro-growth” government. However, some problems delayed to construction progress significantly. Those problems were with the land. Part of the Gaea Gem’s target land had already allocated for other purpose in previous government development plan. Therefore, the company needed to coordinate with different departments in government. Without any material progress for nearly half a year, the company appointed a manager who used to hold a senior position in government to take in charge. Due to the manager’s previous government working experience and good relationship with political leaders, he managed to solve the land problem. And the company was able to move on.

10 comments:

This is a very interesting experience from Shuichang. I’m very interested in the government relations about the countries in Far East. And this blog entry show how dependent the government form companies is. In my country, nowadays, it is around differently – especially in the financial sector. Now, many financial institutes are much dependent from the government’s financial help. With respect to “Government Relation” currently I can attach only the financial supports of the state because of the consequences of the financial crisis.

In my opinion the balancing of accounts after “mark-to-market”-model was responsible for the bank crisis. Financial securities were set with a too high value. At the money market increasing interest was finally the trigger that borrowers could not pay their credit rates any more. Credit failures were the consequence which were for debits of the bank reserves. The credit failures, however, occurred increasingly, that the banks had to dissolve their reserves almost or completely. The past two years have seen everyone add massively to reserves, generating billions in accounting losses and the destruction of the capital base.

Now the SEC and the Treasury department claim stricter procedures for bank borrowing and demand the formation of provident funds. This is a current example who the government or a public authority try to regulate the banking business. I think it’s even a long way for the legislator to find control rules for this major business.

Do you suppose that all loans are not equal and the chance of default is not equal and therefore the banks have to calculate and to occupy the costs of risks already in front of suffice the loan. So it’s absolute necessary that every bank have to implement a risk adjusted pricing about their loans. They will build reserves in front of a possible default of the credited party.

The loan loss reserve is typically based upon loss history of similar loans at a particular institution. This means that a financial institution can calculate their risk reserves on loans in a similar way or they can use an advanced approach to calculate the probability of default and the loss given default.

In the last two years my financial institute had not much defaults. We have increased our provident funds and used the risk adjusted pricing for loans continuously. Before I started my foreign study I had calculated the risk bonus of our new loans again. So we could adapt once more the interest rates at the new conditions. I am convinced that we are armed well for future credit failures, right now.

My article and the comment based on a currently "real-world" example from my occupation. The topic from the chapter nine was pick up in an article from “The Wall Street Journal”, published June 23rd, 2009. The link will give the article for the subscriber content preview. The whole article was printed on page C3 .

I am a bit surprised to learn that things are nearly the same in China as in India. Liu gave a good example of how Gem arrived at the solution.

A matter of fact my father had also purchased a 20 acre land to build a new factory and left it for a year without any construction, soon some of the dacoits captured the land and made a false land deed on their name. Till date we are having a court case and it seems that the solution will take a long time, probably we must go and hire some manager who has good ties politically.

Why is govt. relations necessary?

Good government relation is necessary for both large scale businesses and for small scale businesses as well. Small scale businesses can gain fruitful advantage if they together combine as a group and led the government make policies which benefits them. Say for example, India has several handicraft industries which have high demands worldwide especially in European markets, these handicraft industries are based near Agra, Uttar Pradesh. However, the size of each factory is very small as it usually has 12-20 family members working but if we combine the entire handicraft industry it would comprise of thousands of direct labor. Recently, the government has relaxed the taxes for Indian handicraft industry from 10% to 8% and looking for relaxing even more in near future. This was basically because the Indian handicraft industry was facing intense competition in worldwide market because of high taxes. It was not possible if the handicraft group did not carried good government relations.Source: http://www.thaindian.com/newsportal/india-news/india-reduces-excise-service-tax-to-spur-slowing-economy_100159264.html

As far as large scale industry is concerned it is always beneficial for them to maintain a good relationship with the government. Be it the TATA group, the Reliance group, or the Mittal Steel group all have benefited in some way or the other because of favorable government policies and this is because they maintained good government and pubic relationships.

Life Experience Example:

The eldest brother of my father is a surgeon and has worked with Dr. Naresh Trehan who pioneers in heart surgery. After graduating together from King George Medical College Center, Dr. Trehan came to U.S.A. for a research work and mastered over heart surgery, later-on he was summoned by the government of India and became the chief surgeon for the President of India. Besides these he received a very lucrative offer from the government which was a life time tax free earnings and till date whatever he earns or spends there is absolutely no taxes for him. At that point of time he maintained good government relations and opened Escorts Heart Institute and Research Center in Delhi for which he purchased the land for just Rs.1 ($0.02). More recently Dr. Trehan is building a super-specialty medicity in Gurgaon which will cure patients with almost any kind of disease. According to the GE’s website “The MoU between GE and Dr. Trehan's MediCity – a $250 million world-class Integrated Healthcare Facility, was announced in the presence of Mr. Jeffrey R. Immelt, Chairman and CEO, GE and Mr. Kapil Sibal, Honourable Minister of Science and Technology, Government of India.” Source: http://www.ge.com/in/news/news_india_6.html . This clearly shows that Dr. Trehan is reaping good government relations.

Today many businessmen in India are using their strong government relations to seek out benefits for themselves. Sukhram, an Indian minister for telecommunications was convicted by court on 5th July 2002 for indulging in corruption by favoring a private party at the cost of Rs 1.68 crore to the public exchequer. Source:http://timesofindia.indiatimes.com/articleshow/15046155.cms . These things are very common in India and people use their good government relationship and often mold the policies which favor them the most, even many businessmen comes to know about the policies well in advance and companies make millions.

Application: I found a great article about how Verizon maintains good government relations:

http://www22.verizon.com/about/community/dc/public_affairs.html

I would also like to share a video which was showed to us by Dr. Gibbs in Organizational Analysis:

The Obama Deceptionhttp://www.youtube.com/watch?v=w-_vNPMWWuQ&feature=related

I think Shuichang's comments about Chinese reforms are interesting. Although I believe in as little government interaction as possible, I agree with Shuichang that sometimes it is necessary and even helpful.

MY EXPERIENCE

Previously in our blog, I have written about the discovery of the Marcellus shale natural gas reserves in Pennsylvania and how this discovery has revolutionized and changed the practices and logistics in the local gas industry. However, there is a more recent and profound impact on the local natural gas industry from the intervention of the Pennsylvania Department of Environmental Protection (DEP). The drilling and fracturing of Marcellus shale formation wells requires extremely large amounts of fresh water. Traditionally, conventional drilling required only a fraction of fresh water to complete. Drilling and production companies extracted this water via water pumping trucks form local ponds, creeks, and rivers. Due to the increases in water demands of the wells drilled in the Marcellus shale, the DEP, and similar New York state agencies, intervened and stopped this practice practically overnight to prevent the water tables in areas experiencing heavy drilling from being depleted. The DEP enacted new agency laws regulating the amounts of water and sources from which this water could be extracted. In fact, the DEP required many of the companies drilling to sign contracts and purchase the water from a municipal source. The initial intent of this new law was to measure and account for all water extracted for Marcellus well drilling. On the other hand, this sky rocketed the drilling costs because now companies had to not only purchase the water they had once gotten for free, but also had to truck it from more distant sources. In addition, many municipal sources had law suits brought against them by angry citizens on water use curtailments. They argued that it wasn’t fair for them to be rationed by the municipality while it was selling millions of gallons of water to the gas companies. This new problem was not anticipated by the DEP, and the water permitting process was slowed down considerably, which in turn, further escalated the drilling costs.In order to alleviate some of the drilling costs and restrictions, many of the natural gas producers sent lobbyists to Harrisburg and Albany to lobby for legislation in their favor. Several of the companies I work for also sent their CEO’s to speak on behalf of the industry. So far, this is an ongoing and very recent process, and all the bugs have not been worked out of the process. It is my experience that matters concerning the DEP are not resolved quickly. Until then, many of these companies are continuing to lobby and gain support in Harrisburg and Albany.

Here is a great article that appeared in the New York Times about the concerns over the water supply due to Marcellus drilling in New York State.

It’s very interesting to learn about how government relations differ in different countries. As for the U.S. it’s obvious that government relations are playing a major role in American business compared to past years. We are certainly pro free market however, the economy is in such turmoil that many believe government interference is absolutely necessary. With two major American car companies filing bankruptcy, the collapse of numerous banks and financial service companies, and the recent need for the Sarbanes Oxley Act, government relations are extremely important.

My Example

As a non-profit organization, the company I worked for relied heavily on government funding. The majority of their money comes from government funding including local, state and federal. When a company relies on this type of funding they have certain expectations. They have to show results. While it’s impossible to gauge the exact level of success that a program provides, there are some tangible ways of measuring success. The organization must keep records that show how many students participated, what was accomplished, and how many hours were dedicated to it. Without satisfying their responsibility the funding will be cut. This directly affects the sustainability of the organizations. Another part of government relations is face time. The executive director and the employees of the company must be visual to those officials who matter. Attending conferences, meetings, et cetera will allow the company to be remembered. This helps when it comes to funding because you were able to build a personal relationship with those people who hand out the money.

As being new to the United States I was reading the chapter to know the business and government relations more. I found out that my country, India, is having more similarities with British system than USA. Liu also shared a nice example of his life. First three pages of the text are important for an international student to know how the government regulation and business started getting connected in this country.

Experience:

As I am from pharmaceutical background, I know that there is always interruption of government regulations in this field regarding improved quality, clinical trials, patents etc. These all changing/updating laws make great impact on the company future plans and revenue.

I was working with Cipla Pharmaceutical in my state Gujarat in India. The Government made a regulation that in one of the state of India, Himachal Pradesh, the tax on production of pharmaceutical will be exempt. So, no tax on the production that you do in that state which can save millions for big pharma companies. So, everyone started moving their production in that state. But the small loan licensed companies which were doing production for them went completely out of business.

This hurt the economy of my state because my state, Gujarat, was sharing 45% of pharma market of India became just 20%. But this regulation made another state better in development. So, government regulation does have severe impact on business.

Global warming, its causes and ultimate effects on world economies has been a “hot” issue especially since the release of Al Gore’s documentary movie, “An Inconvenient Truth. This year the oil, coal and gas industry boosted its lobbying budget by 50 percent, spending $44 million in the first quarter of the year. This is compared to clean energy interests and environmental groups who spent less than half that sum. Seven of the pivotal Democrats who voted on cap-and-trade legislation received campaign donations in excess of $100,000 from the oil and gas industry, coal producers, and electricity firms during last year's elections, according to an analysis provided to the Guardian by the Centre for Responsive Politics. Another two received more than $90,000 last year. This year, opponents of climate change legislation spent $76 million on advertising while supporters have spent just $29 million. Despite the energy industry’s effort, the House of Representatives passed a sweeping climate-change bill Friday. Under cap-and-trade, the federal government would set a limt on greenhouse gases. The cap will be divided into billions of permits that each carry the right to emit one metric ton of carbon dioxide, which scientists say is the greenhouse gas that most contributes to global warming. On the other hand, companies such as Wal-Mart and GE have made “green vows” committing to federal action to cap greenhouse gas emissions arguing that restrictions will spur entrepreneurs and big business alike to move America towards a clean-energy economy (Wal-Mart still sells bottled water). Like the Disney case study we discussed in class, I think it would be interesting to analyze this situation to see why, despite all the money and effort the energy industry spent on lobbying and advertising, the cap-and-trade legislation passed. Last year the coal industry produced some very compelling ads about clean coal technology.

I agree with Shuichang that positive interaction with government gives organization new opportunities. Organizations should integrate government relation into its strategic planning. Government policies can affect the competitive positions of individual firms. The firm has to work and compete to influence such policies. There is a changing climate with regard to the relationship between business and government. The business community is being very practical about this. Business can sense this change and they have two options either to sit on the sidelines and watch the legislation go by or they can help shape the legislation.

My Experience:I was working in Nokia during my internship as a communication engineer. In India government is struggling to find a way to connect people living in the rural areas to the rest of country. Government was not able to find a way that is affordable for the residents of rural area. Government decides that the WiMAX can be the solution to the problem. Nokia sense this as an opportunity to improve its government relations. Nokia has great opportunity to get financial benefit from this project. This message was communicated to every employee of the company and we are asked for our feedback. After getting the feedback of the employees company decided to enter the market. Nokia offered its services at a price that can be afforded by local residents. This way Nokia helped government in their social responsibility and created a positive image for them self in the eye of government.

Saudi Arabia is like any other company regarding government where you have to know some good connections that would help with your business obstacles. A friend of my father, Mr. Ahmad Ali, is a well-known and respectable businessman in the field of automotives and their accessories.A few years back, Mr. Ali had an issue about window tinting. He bought a huge shipment of tint, but the tint was mostly 5% in concentration which is darker than what is permitted by the Transportation Ministry which was 20% in concentration. The shipment was worth around 3 million riyals, and he needed to sell the shipment at any cost. With people stopped tinting cars and other franchises that didn’t want to buy from him, he needed to act quickly to resolve the situation. He was clever in his resolving the problem because he used the most important element of such society like the one is Saudi Arabia. In Saudi Arabia, you can justify anything in the name of Islam because it is our constitution. He talked to his friend who was the office manager (secretary) of the minister of transportation. He told that Saudi Families need to have their privacy in vehicles. By tinting windows of the cars we can give them the privacy they desire. His friend proposed the idea the Minister which he liked and implemented around Saudi Arabia.To connections in the government nowadays is both crucial and required for the prosperity of your business. This was a prime example that helped Mr. Ali continued his successful business because he worked his way to get to know recognizable figures in the government. If someone else was in the same situation, he might’ve went bankrupted. Here is the link for more information regard Government relation

You're right Liu. The main difference between China and the United States is that we have two totally different political system. The United States is more decentralized than China. Businesses have more discretion over who, what, when, and where their business done. However, over the past few months, it seems that a more centralized government would've been great to have in the past 10 years. Government relations plays a huge role in corporate success sometimes. Corporations who pay millions of dollars to lobbyists in Washington D.C., hope that new policies/laws/regulations will benefit them in the future. Many large corporations have government relations positions held by people who have tight networks with upper-ranking government officials.

My Experience

At Springhill Senior Living, the Director of Safety and Health Affairs has to make sure that our building and health codes comply with federal and state regulations. The director has special contacts with the Dept. of Labor and the Dept. of Health who update them on any new regulations that codified. He also makes sure that the entire facility passes inspections by other various organizations, including the local fire department. I couldn't tell you how many times the layout of the kitchen and resident dining rooms have switched around to comply with the new codes. Also, the company has spent plenty of money on new furniture and machinery around the campus because of safety issues.